FHFA: We Want Our Secrets Kept Secret

The administrator of Fannie and Freddie, Edward Demarco, had this to say yesterday regarding a bill to open the GSE’s to the FOIA:

H.R. 463, introduced by Representative Chaffetz, would subject the Enterprises to the Freedom of Information Act (FOIA). FOIA’s “core purpose” is to:

1) Enhance “public understanding of the operations or activities of the government;”

2) FOIA is “often explained as a means for citizens to know what their Government is up to.”

This core purpose is not served by applying FOIA to Fannie Mae and Freddie Mac, which are still private companies operating in conservatorship. They did not cease to be private legal entities when they were placed into conservatorship, nor did they become part of FHFA.

Still private companies?That’s the reason they are shielded? After the taxpayers shelled out $200b (and counting)? Bullshit.

I’m going to give DeMarco a D- on this one. I can think of a half dozen areas in Fan’s and Fred’s checkered past that should be exposed and made public. There is no way the dirt over at F/F should remain hidden. There is one area of inquiry that I think should be correctly viewed in the history books. Allow me a ramble.

In his memoir, former Treasury Secretary “Hank’ Paulson made the following comments. (This covers a time period May – August 2008)

Treasury had been getting nervous calls from officials of foreign countries that were invested heavily with Fannie and Freddie.

Foreign investors held more than $1 Trillion of debt issued or guaranteed by the GSEs, with big shares held in Japan, China and Russia.

Okay. We know this. The likes of China and Russia had Paulson by the balls. And they squeezed. Hank does not give a source for the following information. It was conveyed to him August 8th – 10th , 2008. Hank was in Beijing watching Michael Phelps win medals at the time. Take a stab at where he might have learned this:

Russian officials had made a top-level approach to the Chinese suggesting that together they might sell big chunks of their GSE holdings to force the U.S. to use it’s emergency authorities to prop up these two companies.

Here’s how I think this went down. Paulson was connected in China. He was the CEO of Goldman. He was Treasury Secretary. He had his own access to “top-level” Chinese officials. One of them called and invited him over for a tea.

China:
The Russians see that you are vulnerable. They want to take you out financially. They want to force you to default as they did in 1998. They want China to join them and push you to your knees. There are some leaders here who are in favor of this plan. Others are not. Can you offer me something that I can use to change the outcome of this?

Paulson:
I understand your position. Try to understand mine. Not one penny of the F/F bonds that you hold is guaranteed by the US government. It says so right on the front of the Bond Indenture.

China:
We know the law. But now I tell you our law. If you stiff us with these bonds we will be at economic war with America, and we will win.

Paulson:
Okay, okay, okay. I got you. I see the picture. Here is my response. I will make a promise to you. I will make you money good on these bonds. I will arrange a buyback. I will get the Fed to do this. I will see to it that the amount of the buyback is a bit over the $1T that is now in foreign hands. The US will eat what it does not deserve to eat. You have my word that this will get done before I leave office.

China:
How much time do you need to make these arrangements?

Paulson:
Give me four months. I will get this buyback agreed to as soon as I can. But I, I mean the Fed, can’t go public with it until, say, two weeks after the big election. Give me till the end of November.

This could swing an election. I need some room to get this done. This is very political. Understand?

China:
We will hold off on the decision for a few months.

Paulson:
Do me a favor. Tell the Russians to go shit in their hat.

China:
You have until the first of December.

Four months later, two weeks after that big election; we get this:

Here is how the Fed describes the goal of QE1 (the F/F buyback):

Nothing about balls getting squeezed and side deals with China. If I’m right that this tale played a hand in the how and why of QE1 then it would add a great deal of ‘color’ to the story.

Let’s be clear on few facts. A) The US was never on the hook for F/F. B) If the Fed thought it was necessary to provide a monetary jolt it could have bought Treasuries versus Agencies (that is what they did with QE2). QE1 was a debt buyback that was forced on us. That is a very different kettle of fish than how it was sold to the public. If Paulson had a hand in how this played out it would taint the Fed and the way they conducted policy. There is nothing in the Fed’s duel mandate that says they are supposed to being doing buybacks to bail foreign central banks.

Like I said, this is all just my read of the history. I don’t want to see that our good pals at F/F get a free ride on this. If there were a FOI window for these bums I would be most anxious for them to open their files on who said what to whom regarding these buybacks. My guess is that it started back in August of 2008. Right after Hank got back from China.

Let me remind Mr. DeMarco of the purpose of the FOIA:

A means for citizens to know what their Government is up to.

The details of the GSE buyback need to be known and understood. I want to know what my government, in particular the Fed, is up to. I want to know what brought about QE1. I flat out don’t trust them. That’s why the FOIA in the first place.

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.